E. Premium or Discount on Bonds Payable 1. Discounts and premiums recorded at the time the bonds are sold.

2. Discounts or premiums are amortized each time bond interest is paid.

3. The time period for amortizing equals the period the bonds are outstanding

4. Amortization of bond premiums decreases the recorded amount of bond interest expense,

5. Amortization of bond discounts increases the recorded amount of bond interest expense

III. Accounting for Bonds

A. Valuation

1. Price of a bond determined by the interaction between the bonds’s stated interest rate and its market rate.

2. Price is equal to the sum of the present value of the principle and the present value of the periodic interest.
a. Stated rate = the market rate, the bond sells at par.
b. Stated rate < the market rate, the bond sells at a discount.
c. Stated rate > the market rate, the bond sell at a premium.

2. If a bond sells at a discount, the difference between the sales price and the face value is debited to Discount on Bonds Payable. (contra-account to Bonds Payable). Cash xxx Discount on Bonds Payable xxx Bonds Payable xxx 3. If a bond sells at a premium, the difference between the sales price and the face value is credited to Premium on Bonds Payable (an adjunct account to Bonds Payable). Cash xxx Premium on Bonds Payable xxx Bonds Payable xxx 4. Bonds sold…

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